a bad year in the US for active equity managers

Too much traffic and too much last-minute bricks-and-mortar shopping mean that I’m only getting around to this post late in the day   ..and that this one will be short.


Reports I’ve been reading over the past month or so say that 2014 will turn out to be a very bad year for active equity managers, in two senses:

–a larger proportion of managers than normal are underperforming their benchmarks.  The figure I’ve heard tossed about is a whopping 85% vs. a more “normal” 65%;.  Also,

–the degree of underperformance is more severe than in typical years.

I’m assuming that the 85% is before fees.  The ideas that underperformance is worse across the board than normal suggests that the number of underperformers before fees could be as high as 75% – 80%.

Two questions:

–since investing is a zero-sum game, whose pockets are filling up with the money active professional managers are losing to the index?

–wha makes this year so different?

Since index funds by definition neither win nor lose vs. the index, the underperformance of professionals must end up either as fee income for middlemen (brokers, marketmakers) or dor investors who don’t publicize their returns.  The largest portion of the latter class is individuals, although I find it hard to believe that you and I are beating the index by enough to make such a big dent in professionals’ results.  On the other hand, I have no better answer.

The second point is more interesting, I think.  On a sector basis, I suspect that professionals had too little IT and too much Energy.  2014 has been a recovery year for large-cap last-generation tech like MSFT (+28%) and INTC (+44%).  AAPL, which makes up 3.5% or so of the S&P is up almost 40%, as well.  Not having these names would have been costly.  As to Energy, it’s possible that many pros bet heavily on rising crude oil prices through offshore drilling companies and unconventional oil sources like tar sands and shale oil–all of which would make the holder exceptionally vulnerable to price declines.

ln my strategy posts, I suggested that, because 2015 would be the first year in a long time in which government policy would not be clearly stimulative around the globe, the fundamental question of whether the near-term market direction will be up or down won’t obviously be “UP” for the first time since early 2009. Not knowing in advance whether to be aggressive or defensive would make portfolio structuring that much more difficult.

In hindsight, maybe the first year of no one-way bet has been 2014.  If so, it’s possible that this year’s performance by pros isn’t the outlier.  Maybe 2010-13 are.  I wonder, in other words, if this year’s poor active manager performance is a harbinger of what the future has in store.

More on this topic after Christmas.  Now to present wrapping.


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